The Capitalism They Hate. Part I. The Inequality Machine

In exploring why majorities all over the world now perhaps more than ever disapprove of capitalism, and why the most vocal positively hate it, this two-part essay deals with the clash between some aspects of contemporary capitalism and ideals of equality and decency. In Part I, The Inequality Machine, a look is taken at the impersonal and self-regulating “machine” that spews forth inequality but also works to level off what it has so poured out. In a wide open economy, the equalising tendency is liable to go unnoticed. Part II, Indecent Earnings, discusses why some inequalities strike most of us as indecent, why the modern economy generates many such inequalities, and leaving them well alone may be their least bad remedy.

Freedom of contract is inexorably followed by streams of voluntary exchanges and a widening division of labour. Individual ownership of the goods exchanged and of the factors that produce them, completes the necessary conditions of the capitalist system. It is easy to grasp that this system must ceaselessly generate unequal distributions of income and wealth, and also that these distributions will not settle down to any particular durable pattern.

Unequal distributions spring from two sources. One is inequality of endowments, inherited or acquired. Talent, force of character, strength of will, industry and thrift may be genetically implanted or learnt, knowledge, a "network" of friends, acquaintances and patrons and command over capital and credit may be inherited or acquired. Some of these differential endowments can in principle be destroyed or levelled out by forcible collective action. Capital for one, may be confiscated and held in "social ownership" or redistributed equally. Knowledge may be more equally spread by setting up a universal and "anti-elitist" educational apparatus. Most endowments, however, cannot be eliminated or equalised, and will inevitably produce unequal incomes and possessions. However, even if in some Utopia all individual endowments could, by clever legal, fiscal, educational and technical devices, be flattened out, there would still remain one generator of inequality, probably the most powerful of all, namely luck. It is by definition random, it rides roughshod over government policies as well as over personal merit and desert. If nothing else made for inequality, luck alone would suffice to keep the great Inequality Machine of capitalism churning out a kaleidoscopic pattern of incomes and wealth, in which any advantage gained would provide means for further advantage, helping the rich to become richer.

Dislike of inequality may have many motives. Some ascribe it to the genetic heritage of humanoids and pre-agriculture humans, for whom equal sharing may have been a good survival strategy for one's genes—though it has become an obsolete and inferior strategy since man has learnt to grow and store food for himself and his family. Others, plausibly enough, trace the roots of egalitarianism to plain envy. Be that as it may, the expectation of gain from the flattening out of the distribution would always serve as an egalitarian incentive for all with below-the-mean income or wealth. However, none of these motives is really avowable; none sounds unselfish or noble enough.

Charitably screening any such naked opportunism from open view, educated opinion has put up the moral imperative of "social justice" whose runaway success in academic and other intellectual circles in the last half-century is a sad illustration of how easily gaseous concepts and pompous jargon overcome straightforward logic. Instead of saying that many desire equality for a variety of more or less respectable reasons, we must now say that inequality is unjust—a very different proposition.

A little thought reveals an awkward feature of "social justice theory". If, by some miracle, complete equality were once brought about, social justice would still not be satisfied, for it can never be. It would at that point require the creation of new income inequalities in order to achieve equality of some other welfare criterion, e.g., utility levels. However, since nobody knows nor can ever discover anybody's utility level, to affirm that they are now equal is no more valid than to affirm that further income inequalities are required to make them equal. Any distribution could be found unjust on some ground and such a finding would be no less valid than any other. This insight highlights one of the pathetic infirmities of social justice, namely that it has no rules by which a socially just state of affairs could ever be identified. Trying vainly to capture it, the foolish carousel can keep going round and round forever.

At all events, thanks to social justice "theory," capitalism as the great Inequality Machine, stands guilty of spreading injustice all over the social landscape. From 1917 to 1989, the social and economic disaster that was the Soviet empire served as the great excuse that made most sober-minded people forgive capitalism's sins. Capitalism delivered the goods, and socialism did not. This was very nearly a knockdown argument. Attempts at building social-democratic halfway houses in which one can have it both ways have had indifferent success. As the dynamics of the welfare state are coming to be better understood, these attempts carry less and less conviction. Yet, as the hopelessness of "real existing" socialism fades from immediate memory, and as it is being taken quite blithely for granted that no matter what, capitalism will always deliver the goods whether we prize or blame it, opinion towards it is becoming less forgiving.

"Globalisation," or rather its great acceleration in recent decades, has made forgiveness harder to grant. If the world economy were made up of many well insulated compartments, the Inequality Machine would soon neutralise itself by starting to work in two opposing ways. Once capitalism took hold and the rate of capital accumulation exceeded the rate of growth of the active population, the rich would no longer become richer as the poor became poorer. Instead, with the supply of labour expanding less fast than the demand for it, both the rich and the poor would become richer, but the poor would become richer a bit faster, offsetting some of the extra inequality resulting from the rich having more capital working for them. The net effect would depend on the actual numbers and on the pace of technological change, but it is a fair conjecture that no Marxian "iron law" would rule the scene.

When, however, the compartments open up, this equilibrating effect may be much retarded. Goods are generally distant from where they are most wanted (or most effectively employed), namely distant in time and in space. The distance in time may be overcome by borrowing from the future, and the cost of doing so is shown in the spectrum of interest rates augmented by some risk premium attaching to the borrowing. Today's moderate interest rates and more particularly the unusually low risk premia reduce the cost of overcoming distance in time, and make the economy more open to a wider range of choices. Distance in space is overcome by incurring transport costs and the communications costs of sending instructions and making payments.

To judge by the persistent widening of the range of tradeable goods and of long-distance trade, the development of transport technology and communications may have been faster than the technology of production, and this development seems recently to have accelerated. The shrinking of time and space probably account for the greater part of "globalisation" dwarfing the effect of lower tariffs and weaker non-tariff barriers to trade.

Quickening globalisation in recent decades has impacted inequality in the developed economies of the Western world in two ways. The return on capital has increased and so has the share of capital in national income. Concurrently, the rate of increase in the real wages of the semi-skilled and the unskilled has slowed down or, in some areas, stopped altogether. The joint effect accounts for the widely voiced impression that the rich are getting richer and the poor poorer, though the latter part of the diagnosis is not really correct. The impression is in any case strong enough to condemn severely the Inequality Machine for sacrificing the middle and lower working classes on the altar of free trade, and to lend urgency to demands for protection of all kinds.

Some defenders of globalisation argue that it is not the opening up of economic compartments that cause the unskilled and semi-skilled to be left behind, but labour-saving technological progress. Even admitting that technological change is nearly always labour-saving and hardly ever capital-saving, its supposed effect on the supply-demand balance in the labour market is conjectural. It can lead to the conjecture that a run of labour-saving innovations could push the level of wages crashing down unless generous unemployment pay is offered to those who will not work for lower wages. However, recent economic history suggests that chronic unemployment is more typical of welfare states obsessed with social justice than of countries where labour-saving information technology has made the fastest progress.

The most plausible explanation of stagnating or slowly rising wages in the Western world is that globalisation is indeed the culprit. The elasticity of supply of labour in Western economies has been drastically increased by the addition to their labour force of hundreds of millions of Chinese, Indian and Indonesian workers who have for practical purposes become part of the Western labour market due to the vastly reduced cost of bringing their output to Western product markets. There is, as yet, no matching increase in the supply of capital, even though its accumulation has accelerated somewhat. Elementary reasoning leads one to expect that income distribution in the West will tilt in favour of capital. The facts bear out this expectation. The Inequality Machine of capitalism is guilty as charged.

What this judgment conveniently fails to notice is that globalisation is global. Income distribution is changing not only in Western Europe and North America in the wake of shrinking transport and communications costs, but also in China, India and Indonesia. Third World employment is expanding rapidly, labour is migrating from the subsistence to the market economy, and its wages, starting from an abysmal level, are catching up with First World levels at a double-digit annual rate. The factor price equalisation theorem is hard at work thanks to the fusion of insulated compartments into an open world economy. Here, the Inequality Machine is producing more equality on a colossal scale by lifting the Eastern very poor to near the level of the Western poor. Nothing else, no development programme, no "war on poverty," no humanitarian campaign is in sight that would be remotely capable of doing the job. The envious and the morally indignant may hate capitalism for making the rich richer, but would they rather have the very poor remain very poor?

*Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.